Currency and credit Notes in English Class 10 Economics Chapter-3 Book-Understanding Economic Development

 

A medium of exchange

• Use and importance of money:  Money is an important part of our daily life and is used in various transactions. Money is used to buy and sell goods, avail services and make payments. The main reason for this is that money can be easily used in exchange for any goods or services.

• Double coincidence of wants:  A shoe manufacturer makes money by selling his shoes and then buys wheat with that money. If money was not used, he would have to find a farmer who also wanted shoes in exchange for wheat. This is called the "double coincidence of wants," which makes transactions without money complicated.

• Solution of Money and Simplification of Trade:  Money solves this problem and simplifies trade. The shoe manufacturer now just finds a buyer to sell the shoes and can then buy any goods or services with that money. Thus, money acts as an intermediary in the exchange process, making transactions easy and convenient. This is why money is very important in today's economic life.

Modern forms of currency

• Evolution of money and its role in transactions:  Money is a medium that facilitates transactions. In ancient times, various things were used as money. For example, in India, grains and animals were first used as barter.

• Introduction of Metal Coins:  Over time, coins made of metals like gold, silver and copper came into use as currency. This tradition continued till the last century, and the value of these metals was stable, providing a fixed medium of trade.

• Modern currency and change:  In today's time, modern forms of currency such as paper notes, coins, and digital payment systems have become an important part of our lives. This change is making transactions faster, easier, and more convenient, simplifying both business and personal transactions.

Form of modern currency

1. Currency

• Modern currency consists of paper notes and coins. 

• This is different from earlier currencies, such as gold, silver, copper coins, grain or animals. 

• Modern currency has no real use, like gold was useful in jewelry or grain in food.

• The government recognizes it as legal tender. In India, the Reserve Bank of India issues notes on behalf of the government. 

• According to the law, no person or organization can issue its own currency. 

• Moreover, the rupee is legally recognized in India, and cannot be rejected in transactions. This is why the rupee is the main medium of exchange in India.

2. Deposits in banks

• People deposit their extra cash in banks. They need limited currency for their daily needs, and banks are a better option for keeping the remaining money safe. For example, workers who receive salary at the end of the month deposit their savings in bank accounts.

• Banks accept these deposits and also pay interest on it. This keeps people's money safe and they also get additional profit on it. People can easily withdraw money from their account when needed. This type of deposit is called "demand deposit" , because it can be withdrawn anytime as per demand.

Economic Development and the Role of Demand Deposits

• Demand deposits are a special facility that makes them as important as currency. Payment through cheque is an example of this. A cheque is a paper in which the account holder asks the bank to give a fixed amount of money to another person.

• This method makes it easy to transact without cash. Demand deposits have all the essential properties of money, so it is also considered as a form of payment like currency and is considered a part of money in the modern economy.

• Banks play a vital role in this process. They keep demand deposits safe and facilitate payments when needed. Both currency and demand deposits are an important part of the banking system and help in economic development.

lending activities of banks

• Use of Deposits by Banks: Banks use the deposited money in an interesting way. Banks keep a small portion of the deposits, about 15%, as cash. This provision is made because only a few depositors come to withdraw cash on any given day. This keeps the bank running smoothly and does not require additional cash.

• Use of deposits for lending: Banks use a large part of the remaining deposits for lending. There is always a demand for loans to finance economic activities. In this way, banks mediate between people who have excess money (depositors) and those who need money (borrowers).

• Bank income and promotion of economic activity: Banks pay interest on deposits but charge higher interest on loans. The difference between the higher interest received from borrowers and the interest paid to depositors is the main source of income for banks. In this process, banks promote economic activity as they provide financial support to trade, investment and development through the loans they give.

Credit Conditions

• Loan and its role: Many times in our life we ​​have to take loan for money. Loan means that a person takes money, goods or services from someone and promises that he will repay it later. The role of loan can be understood with two examples.

• Good effect of loan: In the first example, Salim took a loan to do work. This loan helped him meet the expenses and finish the work on time. This increased his income. In this way, the loan improved his condition.

• Bad effects of debt (debt trap): In another example, farmers take loans to grow crops. This loan is for seeds, fertilizers, water and other expenses. Farmers usually repay the loan by selling the crop. But if the crop fails, they cannot repay the loan. Like it happened with Swapna, and she had to sell her land. This is called a "debt trap", when the loan makes the situation worse.

• Proper use of loan: If the loan is used properly, it helps in increasing the income. But if there is a loss, it can increase difficulties. Therefore, it is important to make a proper plan before taking a loan.

Loan Terms

• Loan terms and interest rate: Every loan has certain terms and conditions attached to it, the most important of which is the interest rate. The borrower has to pay interest along with the principal amount to the lender or the bank. This interest increases the cost of the loan, due to which the borrower has to pay a higher amount.

• Collateral (vehicle, land, etc.): In addition, the lender may ask for a "collateral" in the form of property. Collateral is property, such as land, a building, a vehicle, or a bank deposit, that the borrower provides as a guarantee. If the borrower defaults on the loan, the lender can recover its money by selling this property.

• Loan terms and payment methods: Loan terms include interest rates, collateral, required documentation, and payment methods. These terms may vary from loan to loan and depend on the situation of the lender and the borrower. Next, we will see how these terms vary in different loan arrangements.

Formal and Informal Credit in India

People in India take loans from formal and informal sources to meet their expenses and needs.

1. Formal sources

• Loans from banks and co-operative societies come under formal sources. 

• They are operated under the supervision of the Reserve Bank of India (RBI). 

• RBI ensures that banks give loans to small farmers, small businessmen and the needy at cheap interest rates. 

• Banks have to provide information about the interest rates and disbursement of their loans to RBI from time to time.

2. Unofficial sources

• Loans from moneylenders, traders, relatives, and friends are informal sources. 

• There is no monitoring on them and they give loans at high interest rates. 

• Poor people often depend on these sources, making it easier for them to fall into a debt trap.

3. Debt burden and poverty

• Due to high interest rates of informal sources, most of the income of poor families is spent on repaying loans. 

• Sometimes the loan repayment exceeds their entire income.  This deprives the poor of opportunities for development.

4. Difference between rich and poor

• Formal loans are mostly availed by rich families. 83% of loans of urban rich families come from formal sources, while 54% of loans of poor families are taken from informal sources. The situation is the same in rural areas as well.

5. Solution

• Formal credit should be expanded by increasing the reach of banks and co-operatives in rural areas, so that people do not remain dependent on informal lenders. 

• Along with this, it is important to make cheap and accessible loans available to all people, especially poor families. Cheap loans will help poor families to increase their income and improve their standard of living. 

• This move will not only encourage individual development but will also contribute to the economic progress of the country.

• Cheap and equitable credit distribution will not only help the poor but will also accelerate the development of the country.

Self Help Groups (SHG) for the poor

1. Difficulties in obtaining loans in rural areas

• Poor families in rural areas often find it difficult to obtain loans. 

• It is difficult to get loans from banks because they require collateral (like property or guarantee) and papers, which the poor do not have. 

• On the other hand, moneylenders provide loans even without documents, but they charge high interest rates and harass the borrowers.

2. Solution for Self Help Group(SHG)

• The solution to this problem has come in the form of "Self Help Group" (SHG). 

• Under this scheme, the rural poor, especially women, are organised into small groups. Each group has 15-20 members who meet regularly and save. 

• This saving can be from Rs 25 to Rs 100 or more per person. Group members can take small loans from this savings to meet their needs.

3. Loan arrangement by SHG

• The group gives loans to its members at low interest rate, which is cheaper than the moneylender.

• After regular savings, the group also becomes eligible to take loan from the bank. 

• This loan is given for purposes like increasing self-employment opportunities, releasing land, purchasing seeds and fertilizers, building a house, purchasing a sewing machine or animals.

4. Group decisions and debt responsibility

• In a self-help group, all decisions, such as loan amount, interest rate, and repayment period, are taken jointly by the members. 

• The responsibility of repaying the loan also lies with the whole group, due to which banks are easily ready to give loans to poor women.

5. Social and economic benefits of SHG

• SHG helps the poor to overcome the problem of indebtedness. 

• It not only provides financial support but also makes women self-reliant. During group meetings, members can also discuss issues such as health, nutrition and domestic violence. 

• In this way, self-help groups become a medium of not only economic but also social change.